Ups and Downs of Baltic Co-operation

A wide network of trilateral institutions now link Estonia, Latvia and Lithuania. Following the Nordic states’ example, the three Baltic countries have, over the past ten years, developed a co-operation structure revolving around the Council of Ministers and the Baltic Assembly. The presidents of the three countries hold regular meetings, and joint military and defence co-operation projects are underway. At the same time, economic exchange has been liberalised. In comparison with other regional economic organisations, the Baltic States have made significant progress in liberalising trilateral trade. For example, there are more examples of free trade in agricultural products amongst the Baltic States than anywhere else in the world.
Despite the regular exchange of information and co-ordination of joint projects, misunderstandings between the three Baltic States continue to crop up time and again. For instance, Estonia’s leaders have been identifying their country with Northern Europe (Scandinavia) for some time now, thus distancing themselves from the perception of the three countries as a single Baltic group. A few years ago, frequent statements by Estonian leaders about their country’s lead in EU integration caused discontent in the other two Baltic States. At the beginning of February this year, the Latvian foreign minister criticised Lithuania’s aim to join NATO ahead of the other Baltic countries – a statement that took many Lithuanian diplomats by surprise.
Such remarks, which are increasingly being made directly to representatives of foreign countries and the European Commission, are turning trilateral co-operation into a kind of a beauty contest where there are better “prizes” to be won than trilateral co-operation – membership in the EU and NATO.
In recent years, and in the wake of the Russian economic crisis in particular, disagreements began plaguing trade relations. Free exchanges between Estonia, Latvia and Lithuania are constantly being obstructed by unilateral measures that are distorting trade relationships. Ignoring objections from Estonia, Lithuania and the European Commission, Latvia has levied import duties on Estonian and Lithuanian pork for half a year now. Lithuania and Estonia also introduced non-tariff restrictions on trade with the other Baltic neighbours in the past.
So what is behind and beyond the ups and downs of Baltic co-operation?
Although the initial impetus for trilateral co-operation came from a number of historic, political, economic and cultural factors, the current trilateral relations – especially in reference to economic co-operation – are developing under the influence of two essential forces. The first is integration into the European Union and EU policy with respect to the Baltic States both as a group and individually. Local interest groups, which are exerting pressure on trilateral trade, are the other important factor. Both these factors have a bearing on the specific forms of economic co-operation between the Baltic States. Depending on the circumstances, they can encourage as well as obstruct the development of economic relations between Estonia, Latvia and Lithuania. What does that mean?
Although the Baltic countries have been declaring their aspiration to develop trilateral co-operation ever since the restoration of their independence, trade agreements were concluded only because of persistent pressure from the European Union. In other words, the Baltic States have always had an abstract desire to co-ordinate their economic policies and lift trade barriers, but this desire took form only after each of the three governments realised that the EU considers trilateral co-operation an important condition for EU integration. This became evident during the preparation of the trilateral agreement on free trade in industrial goods that was concluded in 1993.
Furthermore, trilateral co-operation developed parallel to the Baltic States’ EU integration, although the liberalisation of trade in agricultural products became the exception that proves the rule. The removal of non-tariff trade restrictions was, in principle, based on the rules that are in force in the European Union. Meanwhile, the idea to form a Baltic customs union, raised back in 1991, failed to materialise because the trade policy of each country was too different from the other two, while EU integration did not provide a basis for equalising tariffs.
However, EU influence is a valid factor in economic relations among the Baltic States only as long as each of them is in the same stage of EU integration. After Estonia began EU entry talks, most plans for trilateral co-operation were put on the back burner. Estonian leaders lost their motivation to develop political co-operation with the other Baltic States. As a result, the question regarding the prospects of Baltic co-operation has re-emerged in a different light. What effect trilateral co-operation could have on the Baltic States’ integration with the EU is no longer as important an issue. What matters now is the effect that the different pace of each country’s integration into the EU will have on trilateral co-operation.
Given the change, it can be predicted that further liberalisation of trilateral trade is hardly possible. It is highly unlikely that the plans to liberalise trade in services and the movement of labour force will be carried out. After Lithuania and Latvia began their EU accession talks, their focus shifted to integration objectives. Meanwhile, differentiation of the three countries in the negotiation process is bound to remain. Therefore, increased motivation to further deepen trilateral co-operation beyond the boundaries of EU integration is hardly likely. It is more likely that the three countries will try to co-ordinate the transfer of some EU acts of law into their own legislation. For instance, they are now discussing co-ordination of excise duties. Although the economic foundation of such a move is questionable, it is clear that the main impetus for the discussion came from the integration of the three countries into the EU. Meanwhile, the main problem in the area of trilateral trade is whether or not the joint position on free trade will be preserved if the three countries do not join the EU simultaneously.
Pressure from domestic interest groups has been yet another factor impeding trilateral economic co-operation. Pressure from Latvian farmers has led the Latvian government to impose restrictions on the import of Estonian and Lithuanian pork. Pressure by local manufacturers led Lithuania to launch an anti- dumping case against Latvian match-makers. The same kind of pressure triggered arguments over trade in eggs between Lithuania and Estonia in the autumn of 1998 and between Lithuania and Latvia in the spring of 1999.
It is true that the demands of domestic interest groups are seldom directly aimed at blocking free trade between the Baltic States. However, interest groups play a key role in formulating common economic and trade policies. This is the main reason why pressure from interest groups has been much weaker in Estonia, which embarked on a much more liberal policy than the Lithuanian or Latvian governments from the very outset. Meanwhile, this pressure remains very high in Lithuania and Latvia, especially in the case of agriculture, and the two countries’ governments often bow to it. They submit to demands not only when they could damage the national economy, but also when they violate the country’s obligations to the other Baltic States under trilateral agreements.
Meanwhile, market pressure for the liberalisation of economic ties between the Baltic States has been extremely weak. Despite the growing significance of trilateral trade, the three Baltic countries are still very small markets. More often than not, foreign investors view the Baltic States not as an end sales market but rather as a “springboard” for moving their business to Russia. For local business people, the problems of domestic regulation are relatively more important than further liberalisation of economic ties.
It is true that informal economic integration among the Baltic States is taking place as investments from one country in the other two are becoming more common. Estonian companies are leaders in this respect, but Latvians and Lithuanians are investing in companies in the other Baltic States on a larger scale as well. Nevertheless, this trend is overshadowed by the protectionist demands of the Baltic States’ domestic interest groups, which are consequently obstructing trilateral co-operation.
What is the outlook for further co-operation between the Baltic States? Since the three countries began their EU membership talks, competition in this area seems to have subsided. However, it will not completely vanish until each Baltic country has become a member of the European Union. Indirect political competition was much in evidence before the official announcement of the planned date of each country’s admission to the Union. It will continue while talks go on, as the Lithuanian and Latvian governments have declared their aim to catch up with the first group of candidates, including Estonia. The main dilemma faced by the Baltic leaders is the choice between individual political achievements in the EU integration process and co-ordination of trilateral integration.
The latter form of integration might indeed strengthen the positions of all three countries in their negotiations with the EU. However, judging from the experience of the past ten years, the Baltic States manage to reach joint decisions only when they are under external pressure. Such pressure has decreased for the time being, while incentives for non-co-operation are rather strong. Incidentally, as the recent statement by the Latvian foreign minister on NATO integration indicates, trilateral relations are in jeopardy in this area as well. Only this time Lithuania rather than Estonia may lead the way.
At present, it would be difficult to predict what course trilateral co-operation between the Baltic States will take once they have joined the EU. It is hardly likely that they will follow the example of the Benelux countries and co-ordinate their positions within the EU. Although the territories, as well as the economic and social problems of the three countries are similar, it is likely that each of them may have strong incentives to co-ordinate their positions with the Scandinavian or Central European countries. Estonia may want to work with Finland, while Lithuania would probably prefer Poland.
The positions of Estonia, Latvia and Lithuania in internal EU talks will probably be more affected by domestic interest groups. At present, interest groups in both Lithuania and Latvia have a great deal of influence on economic policy. Their further influence will depend on the transparency of economic and integration policies in the two countries. The broader the debate on specific political decisions, the less likely it will be that decisions will be adopted based on narrow interests. Restrictions on trilateral trade are the best example of such decisions serving narrow interests. It is also quite unlikely that EU regulations will be used as a negotiating instrument between manufacturers and governments in order to protect some companies or their interest groups by restricting trade between Estonia, Latvia and Lithuania.
In conclusion, integration into the EU, the main driving force behind trilateral Baltic co-operation, may also be the factor that will eventually put an end to institutionalised trilateral co-operation. After the countries have joined the EU, the Baltic Assembly and Council of Ministers will be devoid of their meaning since common issues will be tackled in EU institutions. The co-ordination of positions among the countries will also depend on specific issues and domestic interests. Trilateral co-operation in foreign policy and security policy will also be co-ordinated on the EU level. Meanwhile, the consequences of NATO integration on trilateral co-operation will depend on whether or not the three countries join the alliance simultaneously. If not, it remains to be seen whether the first entrant will remain as active in supporting the other two Baltic States as Poland is now in supporting Lithuania’s bid.
This article was published in the Lietuvos Rytas daily in April 2000.